The financial crisis of 2007 chipped away at the trust that many people used to have in traditional providers of financial services. This loss of faith, combined with the new technologies and an influx of money into fintech startups, has led to the creation of innovative new financial products and services, ones that put financial control back into the hands of consumers.
Fintech startups are tackling some long-standing issues — such as high fees, complex products and lack of transparency — by leveraging data and digital technologies to deliver products and services that are less expensive and more consumer friendly. Because they're working with a clean slate, startups are often more tuned in to what matters to today's consumers, innovating around their needs and delivering easy-to-use digital solutions.
Startups are also competing with incumbents for the consumer's trust by reducing complexity and making fees transparent.
Incumbents must keep an eye on shifting expectations in insurance, banking and investing to stay ahead of the innovation curve.
Challengers in InsurTech
For example, Metromile is turning American car insurance on its head with a pay-per-mile offering. They recognize that the biggest risk factor for having a car accident is the number of miles you drive, so they offer lower rates to people who drive less.
While Metromile partnered with traditional insurance companies to underwrite some of its products, other InsurTech startups are going all in as a fully integrated insurance carriers. Lemonade, which recently raised $34 million from investors, is using artificial intelligence to offer affordable renters and homeowners insurance in New York. As a certified B-Corp, they are turning insurance into a social good by donating profits to causes chosen by their customers. They believe this will discourage the embellishment of claims, reducing their cost of doing business.
But even fully integrated carriers can't escape an interdependence on the industry's giants to fulfill their obligations. Lemonade has partnered with Lloyd's of London as their reinsurer, since the high cost of entering the insurance market means it will take some time before they can stand on their own two feet.
Digital-only Retail Banks
Meanwhile, the banking industry has seen new entrants create stand-alone consumer-oriented brands and products. Atom Bank, the first mobile-only bank in the U.K., lets customers choose their logo, name and colors for their app. Monzo, another U.K.-based digital-only bank, is building products from the ground-up with the help of its user community. Meanwhile, U.S.-based BankMobile is targeting Millennials with its “8 Tenants of Awesome Banking" and by offering features such as a peer-to-peer transfer feature.
With no branches or legacy IT systems to maintain, these new banks are simply more nimble than traditional banks, allowing them to listen and adapt to consumer needs much more quickly.
On the wealth management front, startups such as Nutmeg and Betterment are making investment expertise available to the masses. They are replacing financial advisors with algorithms that dish out targeted advice based on an individual's risk profile, savings and goals.
While automation is at the heart of their product offering, both companies go to great lengths to humanize their brand and service. Nutmeg, for example, offers five different ways to contact their support team and boasts that customers can get in touch with the same representative they've spoken to before. Betterment was named by Consumer Reports as one of the top five brokerages for customer service, along with Vanguard and Schwab. At both Betterment and Nutmeg, all employees — even the CEOs — are required to log hours on the support line.
Lower fees, higher returns and better customer service may lure customers away from traditional financial advisory services. While the industry is trending towards a hybrid approach — Betterment recently announced it is introducing access to human advisors — incumbents will have to defend higher premiums attached to face-to-face interactions by offering value-added services or staying hyper-focused on clients with more complex needs.
How Incumbents Can Thrive in the New Competitive Environment
As new insurance, banking and wealth management players come onto the scene, competition is sure to increase. The winners will be those who best understand their customers' needs and put them front and center.
So what can financial services incumbents do to stay relevant?
Bringing innovation in-house is one option, though legacy infrastructure may prove difficult to navigate, and customers aren't necessarily expecting traditional players to offer new products. Corporates can also try to emulate the values that startups are pushing, but culture and brand perceptions take a long time to shift.
In the short-term, a smart approach might be to invest in startups and share in their profits, or to follow in the footsteps of big players in the insurance industry like Lloyd's of London and seek strategic partnerships with startups.
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